Tesseract
20th November 2013, 04:30
Feeling a little uneasy about the US stock market, thought I’d share my thoughts.
While I feel the bull market has been justified qualitatively, it has, in my opinion, gotten out of control, thanks in large part to huge capital injections by banks that are flush with Fed cash.
This is what has happened in the last few days though:
Massive amounts of SPY puts have been bought at at-the-money strikes. Whoever is buying these believes the market will fall soon (within a few weeks).
Reports are also coming out of large numbers of out-of-the-money strike VIX calls being bought. Whoever is buying these also makes money if the market falls. The out-of-the-money strike implies that the purchaser is expecting a rather large market fall, probably > 10 %. This would have to happen by mid-march. It’s worth mentioning that for every buyer there is a seller, who thinks that these things won’t materialise.
Earlier in the year, there was a thread on Avalon, linking to a well-publicised article, about large VIX options transactions implying an imminent market fall – I analysed this and came to the conclusion that the transactions actually were being used as a hedge and the person responsible was actually betting on a market rally, which is precisely what transpired. However, this latest round of VIX calls are so incredibly far out of the money they reek more of ‘lottery’ calls than they do of a hedge strategy. Additionally, it makes far more sense to be betting on a correction at the current moment, given the near drug-like euphoria the market, and market commentators, have been in recently.
Tonight Ben Bernanke gave a speech, which I watched (not something I am in the habit of doing), but it was actually a great educational speech. What shocked me was that he made it very clear (to me, at least) that QE was likely to be cut back quite soon given the steady improvements in the labour force. As I write, the media is seemingly pretending he didn’t mention this, they are instead focussing on his interest rate comments (he said they can stay low for a very long time, not to be dictated by employment etc). I watched SPY (S&P 500 ETF) futures drop somewhat as he gave his speech.
So, we’re in for some interesting days. What do I think? I think the market will indeed drop by at least 5 % and as much as 15 % over the coming weeks.
While I feel the bull market has been justified qualitatively, it has, in my opinion, gotten out of control, thanks in large part to huge capital injections by banks that are flush with Fed cash.
This is what has happened in the last few days though:
Massive amounts of SPY puts have been bought at at-the-money strikes. Whoever is buying these believes the market will fall soon (within a few weeks).
Reports are also coming out of large numbers of out-of-the-money strike VIX calls being bought. Whoever is buying these also makes money if the market falls. The out-of-the-money strike implies that the purchaser is expecting a rather large market fall, probably > 10 %. This would have to happen by mid-march. It’s worth mentioning that for every buyer there is a seller, who thinks that these things won’t materialise.
Earlier in the year, there was a thread on Avalon, linking to a well-publicised article, about large VIX options transactions implying an imminent market fall – I analysed this and came to the conclusion that the transactions actually were being used as a hedge and the person responsible was actually betting on a market rally, which is precisely what transpired. However, this latest round of VIX calls are so incredibly far out of the money they reek more of ‘lottery’ calls than they do of a hedge strategy. Additionally, it makes far more sense to be betting on a correction at the current moment, given the near drug-like euphoria the market, and market commentators, have been in recently.
Tonight Ben Bernanke gave a speech, which I watched (not something I am in the habit of doing), but it was actually a great educational speech. What shocked me was that he made it very clear (to me, at least) that QE was likely to be cut back quite soon given the steady improvements in the labour force. As I write, the media is seemingly pretending he didn’t mention this, they are instead focussing on his interest rate comments (he said they can stay low for a very long time, not to be dictated by employment etc). I watched SPY (S&P 500 ETF) futures drop somewhat as he gave his speech.
So, we’re in for some interesting days. What do I think? I think the market will indeed drop by at least 5 % and as much as 15 % over the coming weeks.